SUMMARY OF BOARD DECISIONS

Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board´s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue an Accounting Standards Update.

July 20, 2011 FASB/IASB Joint Board Meeting

Leases. The FASB and the IASB discussed lessor accounting, the accounting for lease payments that depend on an index or a rate, and the accounting for embedded derivatives in lease contracts.

Lessor Accounting

The Boards tentatively decided that a lessor should apply a "receivable and residual" accounting approach as follows:
  1. The lessor would recognize a right to receive lease payments and a residual asset at the date of the commencement of the lease.
     
  2. The lessor would initially measure the right to receive lease payments at the sum of the present value of the lease payments, discounted using the rate the lessor charges the lessee.
     
  3. The lessor would initially measure the residual asset as an allocation of the carrying amount of the underlying asset and would subsequently measure the residual asset by accreting it over the lease term using the rate the lessor charges the lessee.
     
  4. If profit on the right-of-use asset transferred to the lessee is reasonably assured, the lessor would recognize that profit at the date of the commencement of the lease. The profit would be measured as the difference between (a) the carrying amount of the underlying asset and (b) the sum of the initial measurement of the right to receive lease payments and the residual asset.
     
  5. If profit on the right-of-use asset transferred to the lessee is not reasonably assured, the lessor would recognize that profit over the lease term. In that case, the lessor would initially measure the residual asset as the difference between the carrying amount of the underlying asset and the right to receive lease payments. The lessor would subsequently accrete the residual asset, using a constant rate of return, to an amount equivalent to the underlying asset´s carrying amount at the end of the lease term as if the underlying asset had been subject to depreciation.
     
  6. If the right to receive lease payments is greater than the carrying amount of the underlying asset at the date of the commencement of the lease, the lessor would recognize, as a minimum, the difference between those two amounts as profit at that date.
The Boards also tentatively decided that the following should be excluded from the scope of the "receivable and residual" approach to lessor accounting:
  1. Leases of investment property measured at fair value
     
  2. Short-term leases.
For those excluded leases, a lessor should (1) continue to recognize and depreciate the underlying asset and (2) recognize lease income over the lease term on a systematic basis.

Lease Payments That Depend on an Index or a Rate

The Boards discussed the measurement of lease payments that depend on an index or a rate included in the lessee´s liability to make lease payments and the lessor´s right to receive lease payments and tentatively decided that:
  1. Lease payments that depend on an index or a rate should be initially measured using the index or rate that exists at the date of commencement of the lease.
     
  2. Lease payments that depend on an index or a rate should be reassessed using the index or rate that exists at the end of each reporting period.
     
  3. Lessees should reflect changes in the measurement of lease payments that depend on an index or a rate (a) in net income to the extent that those changes relate to the current reporting period and (b) as an adjustment to the right-of-use asset to the extent that those changes relate to future reporting periods.
The Boards will discuss at a future meeting how a lessor should reflect changes in the measurement of lease payments that depend on an index or a rate.

Embedded Derivatives in Lease Contracts

The Boards tentatively decided that an entity should assess whether a lease contract includes embedded derivatives that should be bifurcated and accounted for in accordance with applicable U.S. GAAP and IFRS guidance on derivatives.


Accounting for financial instruments: impairment. The Boards continued to discuss a "three-bucket" expected loss approach for the impairment of financial assets. The guiding principle of the approach is to reflect the general pattern of deterioration of credit quality of financial assets.

The Boards discussed approaches to classify and transfer financial assets between the buckets. The Boards agreed to pursue an approach based on credit risk management systems, recognizing that credit risk management is a holistic process that includes evaluating all available information.

The Boards considered whether an "absolute" or a "relative" credit risk model should underpin the transfer and classification of financial assets between the three buckets and decided to develop the relative credit risk model. The overall objective of this approach is to reflect the deterioration or improvement in the credit quality of financial assets, thus making the maximum use of credit risk management practices. Under this approach, all originated and purchased financial assets would initially start in Bucket 1 and will move into Bucket 2 and Bucket 3 as credit loss expectations deteriorate, affecting the uncertainty in collectability of cash flows. Loans acquired at a discount because of credit losses were outside the scope of the discussion and will be addressed at a future meeting.

The Boards also discussed the measurement of expected loss on financial assets in Bucket 1. The Boards agreed to keep the calculation of the impairment allowance for Bucket 1 operationally simple and directed the staff to explore approaches that would calculate the allowance using 12 or 24 months´ worth of losses expected to occur. The Boards also agreed that the calculation of 12 months´ worth of expected losses in Bucket 1 will be based on an annual rather than an annualized loss rate (that is, looking to the losses that are expected to occur in the next 12 months, as opposed to calculating the lifetime losses and dividing by the number of years remaining). The same logic would apply to a calculation based on 24 months.


July 21, 2011 FASB/IASB Joint Board Meeting

Leases. The FASB and IASB discussed the presentation and disclosure requirements for lessees, including presentation in the statement of financial position and on the statement of cash flows.

Lessee Presentation and Disclosure

The Boards discussed lessee disclosures and tentatively decided that a lessee should disclose the following:
  1. A reconciliation of the opening and closing balance of right-of-use assets, disaggregated by class of underlying asset.
     
  2. A reconciliation of the opening and closing balance of the liability to make lease payments (unlike the Exposure Draft, a lessee would not be required to disaggregate the reconciliation by class of underlying asset).
     
  3. A maturity analysis of the undiscounted cash flows that are included in the liability to make lease payments. The maturity analysis should show, at a minimum, the undiscounted cash flows to be paid in each of the first five years after the reporting date and a total of the amounts for the years thereafter. The analysis should reconcile to the liability to make lease payments.
     
  4. Information about the principal terms of any lease that has not yet commenced if the lease creates significant rights and obligations for the lessee.
     
  5. Information required in paragraphs 73(a)(ii)-73(a)(iii) of the Exposure Draft (the Boards will provide guidance, illustrations, or both about those requirements).
     
  6. All expenses relating to leases recognized in the reporting period, in a tabular format, disaggregated into (a) amortization expense, (b) interest expense, (c) expense relating to variable lease payments not included in the liability to make lease payments, and (d) expense for those leases for which the short-term practical expedient is elected, to be followed by the principal and interest paid on the liability to make lease payments.
     
  7. Qualitative information to indicate if circumstances or expectations about short-term lease arrangements are present that would result in a material change to the expense in the next reporting period as compared with the current reporting period.
The Boards also tentatively decided that a lessee should:
  1. Present or disclose separately interest expense and interest paid relating to leases.
     
  2. Not combine interest expense and amortization expense and present as lease or rent expense.
Additionally, the Boards tentatively decided that a lessee is not required to disclose the following:
  1. The discount rate used to calculate the liability to make lease payments.
     
  2. The range of discount rates used to calculate the liability to make lease payments.
     
  3. The fair value of the liability to make lease payments.
     
  4. The existence and principal terms of any options for the lessee to purchase the underlying asset, or initial direct costs incurred on a lease.
     
  5. Information about arrangements that are no longer determined to contain a lease.
With regard to future contractual commitments:
  1. The IASB tentatively decided that a lessee is not required to disclose the future contractual commitments associated with services and other non-lease components that are separated from a lease contract.
     
  2. The FASB tentatively decided that a lessee should disclose the future contractual commitments associated with services and other non-lease components that are separated from a lease contract.
Presentation: Lessee Statement of Financial Position

The Boards discussed presentation in the lessee statement of financial position and tentatively decided that a lessee should:
  1. Separately present in the statement of financial position or disclose in the notes to the financial statements right-of-use assets and liabilities to make lease payments. If right-of-use assets and liabilities to make lease payments are not separately presented in the statement of financial position, the disclosures should indicate in which line item in the statement of financial position the right-of-use assets and liabilities to make lease payments are included.
     
  2. Present the right-of-use asset as if the underlying asset were owned.
The Boards also decided that it is not necessary to clarify whether the right-of-use asset is a tangible or an intangible asset.

Presentation: Lessee Statement of Cash Flows

The Boards discussed the lessee´s statement of cash flows and tentatively decided that a lessee should:
  1. Classify cash paid for lease payments relating to the principal within financing activities.
     
  2. Classify or disclose cash paid for lease payments relating to interest in accordance with applicable IFRSs or U.S. GAAP on the statement of cash flows.
     
  3. Classify cash paid for variable lease payments not included in the measurement of the liability to make lease payments as operating activities.
     
  4. Classify cash paid for short-term leases not included in the liability to make lease payments as operating activities.
The Boards tentatively decided that a lessee should disclose:
  1. The expense recognized in the reporting period for variable lease payments not included in the liability to make lease payments.
     
  2. The acquisition of a right-of-use asset in exchange for a liability to make lease payments as a supplemental noncash transaction disclosure.

Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts. They received an oral report on recent investor outreach activities and considered when insurers should apply the premium allocation approach to short-duration contracts. No decisions were made.

Next Steps

Both Boards will continue their discussion on insurance contracts in September 2011.


Balance sheet—offsetting. The Boards discussed revisions to the proposed offsetting disclosures. The Boards tentatively decided to:
  1. Retain the objective for the offsetting disclosures, namely, that an entity should disclose information about rights of setoff and related arrangements (such as collateral arrangements) associated with the entity´s financial assets and financial liabilities to enable users of its financial statements to understand the effect of those rights and arrangements on the entity´s financial position
     
  2. Modify the scope of the disclosure requirements such that they apply only to instruments under an enforceable master netting agreement or similar arrangement (for example, derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities lending arrangements)
     
  3. Clarify that an entity need not provide the required disclosures if the entity has no qualifying assets or liabilities that are subject to a right of setoff (other than collateral agreements) at the reporting date.
The Boards also tentatively decided to require entities to disclose the following:
  1. The gross amounts of financial assets and financial liabilities
     
  2. The amounts of financial assets and financial liabilities offset in the statement of financial position
     
  3. The net amount after taking in account (1) and (2) (which should be the same as the amounts reported in the statement of financial position)
     
  4. The effect of rights of setoff that are only enforceable and exercisable in bankruptcy, default, or insolvency of either party not taken into account in arriving at the amounts presented in the statement of financial position (including collateral)
     
  5. The net exposure after taking into account the effect of items (2) and (4).

Financial statement disclosures. The Boards discussed a report by the Institute of Chartered Accountants of Scotland and the New Zealand Institute of Chartered Accountants on disclosures in financial statements. This was an informational meeting only; no decisions were reached.


Effective dates and transition methods and Revenue recognition. The Boards discussed the results of additional outreach with software providers and investors as input in considering the effective dates and transition methods for the four major projects—financial instruments, insurance, leases, and revenue recognition. The FASB also discussed the results of additional outreach with users and preparers of financial statements of nonpublic entities (which include non-publicly-listed companies and not-for-profit organizations).

The Boards discussed whether to permit early application of the standards resulting from the four major projects. The FASB agreed that early application generally should not be permitted; however, when making a final decision the Board will consider the facts and circumstances of each individual project. The IASB decided to permit early application of new IFRSs by first-time adopters of IFRSs. The IASB will consider the issue of early application by other entities on a standard-by-standard basis.

The Boards then discussed effective date in relation to the revenue recognition project. The Boards tentatively decided that the effective date of the revenue recognition standard would be set to ensure that the start of the earliest comparative period for an entity required to present two comparative annual periods (in addition to the current annual period) would be a few months after the standard is issued. The Boards noted that based on their current timetable for the project, the effective date of the standard would not be earlier than annual periods beginning on or after January 1, 2015.

The Boards discussed whether to permit early application of the standard. The FASB tentatively decided that early application should not be permitted, while the IASB tentatively decided that early application should be permitted.

The IASB will discuss at a future meeting whether the transition reliefs to retrospective application in the proposed standard should be extended to first-time adopters of IFRSs.


Leases Announcement

The Boards agreed unanimously to reexpose their revised proposals for a leases standard.

Reexposing the revised proposals will provide interested parties with an opportunity to comment on revisions that the Boards have undertaken since the publication of the Exposure Draft on leases in August 2010.